Served by Jesse of Le Café Américain
The stock market rallied today because of a slightly better than expected ISM Services number. Considering how much ‘stimulus’ the government has given to the FIRE sector it should be doing slightly better than the real economy.
Another reason the market rallied in New York today was a bullish call on the banking sector by a Goldman Sachs analyst.
Here is a somewhat different analysis of the situation by Chris Whalen of Institutional Risk Analytics. Chris believes that he sees strong evidence that “the fourth quarter in the banking industry is going to be a bloodbath.”
Astounded by Goldman’s Upgrade Banks Heading Into Storm Says Whalen
Even if Goldman is wrong, and lots of investors take their advice and get hurt buying into banking stocks before an approaching “bloodbath,” they seem to have it covered, at least for themselves, with of derivatives delivering profits into their own pockets should those banks fail. At least this is the pattern shown in their dealings with CIT.
And they could be right. The government might be preparing fresh tranches of bailout money and there could be more toxic assets coming from off the banks’ off-balance-sheets to yours, via the Fed.
Place your bets. Or better yet, save your money, and don’t.
Yahoo Finance
The “Real” Economy Is Dying: Q4 “Going to Be a Bloodbath,” Whalen Says
by Aaron Task
Oct 05, 2009 01:49pm EDT
Stocks rallied to start the week thanks to a better-than-expected ISM services sector report and a Goldman Sachs upgrade of big banks, including Wells Fargo, Comerica and Capital One.
But all is not right in either the economy or the banking sector, according to Christopher Whalen, managing director at Institutional Risk Analytics. In fact, Whalen says most observers are drawing the wrong economic conclusions from the stock market’s robust rally.
“Why is liquidity going into the financial sector? It’s because the real economy is dying [and] everyone is fleeing into the stocks and bonds because they’re liquid at the moment,” Whalen says. “That’s not a good sign.”
The banking sector’s assets shrunk by about $300 billion per quarter in the first half of 2009, a sign of banks hoarding cash in anticipation of additional future losses, according to Whalen. “The real economy is shrinking because of a lack of credit.”
The shrinkage will continue into 2010, Whalen predicts, suggesting the banking sector hasn’t yet seen the peak in loan losses. Institutional Risk Analytics forecasts the FDIC will ultimately need $300 billion to $400 billion to recoup losses to its bank insurance fund. (In other words, the $45 billion the FDIC sought to raise last week by asking banks to prepay fees is just a drop in the bucket.)
“Investors should think about this because the fourth quarter in the banking industry is going to be a bloodbath,” says Whalen, who believes smaller and regional banks like Hudson City Bancorp may come into favor vs. larger peers, which have dramatically outperformed since the March lows.
“When you see the markets rallying when the real economy is shrinking that tells you this [recovery] is not going to be very enduring,” Whalen says.
In this regard, Whalen finds himself in philosophical agreement with Nouriel Roubini, George Soros and Meredith Whitney, among other “prophets of the apocalypse” who’ve once again been raising red flags in recent days.
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The markets are the markets and the economy is the economy. People who have been expecting the overall rather less than green shoot-ish numbers coming out of the economy to be relected in the markets, i.e. for this rally to abate, and have put their money on that, have gotten their heads handed to them. Again and again, after every pullback.
I for one cannot see how the “real economy” — whatever that is anymore in the US — could possibly recover and resume growth so quickly after such a credit/debt-fueled consumption bubble has just been pricked.
But I am less sure on betting the stock market will experience a significant decline.
the markets are the markets and the economy is the economy is especially true when the real economy has little need for all the paper the Fed is sending in all directions. A stuffed consumer (full of debt) doesnt really want to consume unless you literally hand her money (cars, homes). Otherwise a lot of extra money is sitting out there, and its heading into all types of assets.
Inflation in assets while deflation in real economy.
The Alignment of Asset Reflation and a Collapsed Economy
http://www.fundmymutualfund.com/2009/10/guest-post-gregorus-alignment-of-asset.html
I wish I could remember (damn being old and confused) where I read it and link to it, but an article I read quoted Keynes on the market, who likened it to a beauty contest where you have to pick the beauty contest winner based on the top votes getter of 100 people, who are also trying to pick the winner, and who take into THEIR consideration who the majority of the 100 will pick.
If the beauty contest winner only needs a plurality, one could forsee some bizarre winners.
What I see in the stock market rally is the fact that over the course of the decline a lot of cash was accumulated. That cash needs to find a place to earn a return. In an environment that threatens extreme loss of purchasing power to be followed by hyperinflation, equities could be considered to be a rationale choice.
Couple that with the general tendency of the initial phase of a market recovery to be very substantial and you get investment/speculation that is driven by the fear that the best part of the recovery will be missed.
At its core, Goldman was and remains a trading house. They’re very good at it and have been so for a long time. They have managed to imbed their culture with enough skepticism and cynicism to make it possible for them to turn on a dime. The fact that they have come out as being very positive on the banking sector is curious indeed. While they try to maintain a wall between research and the trading desk, despite all their efforst that wall is porous. In this case I have the feeling that their opinion is rendered in light of positions that they would prefer not to be in.
As to the bloodbath, I do believe that the banking sector is extremely vulnerable over the coming three to six quarters. It is also apparent that the greatest risks lie in the larger institutions. Concurrently, a lot of smaller banks have evaporated with many more to come. But, the most dangerous resolutions will be with respect to several priamry dealers.
As much as I respect the trading capability of Goldman, I think their current bank recommendation is off the mark. Brokerage house research has the overriding objective of generating transactions. Whalen’s comments and the Goldman recommendation should be put on your reference calendar of events to be reviewed in mid December and perhaps thru the second quarter of 2010.
Task quotes Whalen:
Actually, the “real economy” is shrinking because it’s been raped and pillaged. “Making money”, “creating wealth” have all become euphemisms for scraping assets out of various enterprises while leaving junk in their wake.
Beyond that, the US has accepted a culture whereby smoke ‘n mirrors accounting is legitimate, “investment advisers” spew a sales pitch while maintaining ignorance of fundamentals, and rating agencies “rate” for a fee rather than for value.
Our universities have become inbred, their research commandeered to the narrow interests of their corporate benifactors. In past generations, they were largely independent… producing breakthroughs into various physical world fundamentals (physics, materials engineering, energy efficiency, etc. etc) that the world increasingly needs given rising populations dependent on dwindling resources.
Beyond that, however, as the pillage of “financial resources” has ravaged US’ cumulative wealth, meaningful education of our populace is sliding off the map. Public universities are offering less to students, research funding is drying up, and the cost of individual student’s education is increasingly becoming untenable.
Both politically and institutionally (private & public sector) we are dysfunctionally incapable of even beginning a meaningful conversation on the basics: water, energy, housing… much less how to meet these rather dramatic challenges.
In it’s most basic fundamentals, “economy” is the cumulative value created by it’s people. It is a population’s critical mass mobilized to produce, solve problems fundamental to what is needed. And IMO, more worrisome is our massive stagnant/un-utilized knowledge base available to the “developed world”, our preparation & ability to meet and provide what society will need to enjoy good quality living in the future is entirely dormant.
So may GS can trade on top of this dysfunction for a while and show a paper profit. But the foundation upon which they are trading is rotting and very, very few in position to do something about it are publicly visible, influencing debate, or moulding a worthwhile course of action.
Even amongst our “educated class”, off the top of my head I estimate no more than 1 in 10 of my friends can articulate even a remotely accurate accounting of the mechanisms which sucked their 401k/retirement funds dry. Rather, they are captivated by various talking heads telling them the “economy” will rebound in (pick the) quarter of (pick the) whatever year, while seemingly having no accurate concept of precisely what the US economy is doing.
AFAIC, we’re in a world of hurt and I don’t see any help on the way.
Actually, the “real economy” is shrinking because it’s been raped and pillaged.
To that theme here’s a great article in the NYT.
But the best part is that the “rapists and pillagers” (also known as “the best and the brightest”) don’t pay 35% regular income taxes like the rest of us. They pay the capital gains rate of 15%:
http://investing.curiouscatblog.net/2007/10/09/lobbyists-keep-tax-off-billion-dollar-private-equities-deals-and-on-for-our-grandchildren/
You don’t reckon the millions upon millions they lavish on K Street or on our fine upstanding politicians has anything to do with that, do you?
http://washingtonindependent.com/40579/private-equity-firms-lobby-less-as-industry-trade-group-takes-more-cash
Like the sea rolling out before the tsunami rolls in.
There is no doubt that equity markets, when judged in nominal terms, can do amazing things when the Fed spikes the punch bowl with grain liquor.
Bull markets are generally corrosive of the average intellect. That is why statists love them so much.
Perhaps I’ve become overly cynical – but I cannot help but believe that the pronouncements made by GS will always (and only) be to serve GS’s interests (i.e., the way I see it, if GS upgrades the banking sector – they are doing so to pump up the prices for their benefit or to direct attention away from other actions they may be taking or are going to take)
I read Jesse’s blog every day and have learned a great deal. One of the things that I have learned is to be a serious skeptic of the pronouncements coming from the powers that be, especially from those that stand to make a profit from market moves in relation to those pronouncements.
Until there is WAY more transparency in the markets, I’ll happily sit on the sidelines until I have clear and convincing evidence that the markets are not being manipulated to benefit some at the expense of others. I’m certainly not going anywhere near banking stocks.
With our present governmental/financial system, I don’t believe it is possible to be “overly cynical”. One is “overly cynical” only if it’s not the reality.
Like most, I was thoroughly indoctrinated with the “goodness, honesty and saintliness” of the American system. At 67, I finally reached, what I consider, a reasonable level of cynicism.
I have been a mgmt level recruiter in the banking and finance industry for over 5 years now and I have just started to see hiring pick up within the regionals. I don’t know how long it will last but right now I have 4 open job orders for wealth management, trust and commercial lending. I was not saying this a year ago.
Also, I have been contacted to collect data for a study currently being carried out to establish a personality profile for use in the banking community.
Activity is picking up in my world
http://www.web-data-collection.org/
it is free for the next 2 weeks if you are interested
There should be a large number of qualified candidates for these banking jobs being released from jail within the next few months.
I love the Taibbi-inspired giant squid graphic. Goldman Sachs should proudly adopt it as their corporate coat of arms.
The actual Vampire Squid is rather cute, in a squiddy sort of way:
http://en.wikipedia.org/wiki/Vampire_Squid
Dimensions a bit disappointing.
The prime mortgages are representative.
If they are walking away, you can count
on the intelligent kids to walk away.
Mortgaging their future without their
consent was a critical failure on the
part of people who couldn’t program
their own VCRs.
First they build the gallow by replacing
people with computers in their distribution
systems, then they put their own heads in
the noose by applying asymmetric filters
on the internet, and, finally, they threaten
to pull the lever by installing a kill switch.
Can’t wait to see the ending. It’s quite a show
What they need is a new deal for the kids.
Give them their parents back, let them build
an education system as the hub of the new
economy, and get out of their way.
Among new families, the kids are in charge
the minute they are born. The legacy families
are accustomed to bullying their kids from
the minute they are born, so they naturally
built a system to bully the rest.
Kids from new families don’t tolerate bullying,
and they will bring down the entire system
without thinking about it for a nanosecond.
They know they are the product of natural
selection, and that capital has no choice
but to chase talent.
The real thread that caused collapse among
the legacy families was their failure to
recognize the rare products of natural
selection among themselves. They
terminated their own circulation.
This post-industrial economy leaves a little to be desired.
I keep waiting for the post-financial economy to emerge but the vested interests are working hard to (as usual) use ‘other peoples money’ to resuscitate financial-ism and restore it to its glory days preceding 2007.
You think the phrase “I’m from the Government, I’m here to help” is a laugh? Try replacing “the Government” with “the Bank”!
Here’s hoping that those job orders for “..wealth management, trust and commercial lending..” (trust??) remain unfilled.
Because of fractional banking these so called healthy banks have less than 1% on deposit. When the FDIC up front payment is due Dec. 31 most of these banks will be wiped out unless they get more TARP like donations from the FED. The real crunch for small banks will come in the spring.
I’ve come to think of Goldman Sachs as the house. If they’re telling you to bet on black, they probably expect the wheel to come up red.
And jdmackay, spot on. Trying to get two kids through college now is a huge strain as a parent. I’m insanely pissed off that education has been turned into an expensive and entirely unaffordable thing. If we had a fucking clue we would be giving away college educations and running calculus classes on TV instead of dancing with the fucking stars.
donna,
Is that perhaps what drove some of the students to protest during the G-20 at Pittsburgh?
Anyway, some of the kids made up this video to express their displeasure with the situation. I suppose when you deal with young people, it always comes with a healthy dose of humor and horseplay:
Hitler running security during G20 Pittsburgh NSSE (Hitler spoof)
http://www.youtube.com/watch?v=dm1kSMSDJBw
It’s absolutely hilarious, and does a great job of getting the filmmaker’s message across to boot.
O/o magnificent gut buster!
Students and protesters should pelt the paramilitaries with Happy Meals instead of other things ha ha, the one object that best describes *Free markets* with its 360 degree attack on any Free thought out side its narrow compass.
Skippy…If I ever needed to resort to ballistics again, my piece would be named Happy-Meal.
It is all part of the grand plan. We certainly don’t want an educated middle class.
If one of them happens to get through and manages to pay off $160k in student loans, we might think about recruiting them for the Goldman Sachs team.
“Why is liquidity going into the financial sector? It’s because the real economy is dying [and] everyone is fleeing into the stocks and bonds because they’re liquid at the moment”
Money isn’t going into the real economy so there aren’t many other places it can go except into stocks, bonds, and commodities.
I suppose it is inevitable that something can only be validated by official validators like Soros, Roubini, Whitney, etc., but many of us have been raising red flags about this recovery ever since there was first talk of it.
The one advantage that the stock market has over other classes of assets is it’s synthetic component. The new normal is the new normal until it’s not.
What was I thinking….?
Is anyone in this comments section old enough to have worn a leisure suit…?
Ciao,
Econolicious
That’s pretty good insight on the reasons for the unpredictable gains in the market from the March lows. The economy is in shambles and the banking sector keeps rising because of their new accounting methods. They then bring the DOW up and everone thinks the economy is improving. I think this last quarter will be a real indicator of how bad things are going to get…a lot of the companies are barely holding on hoping for more volume during the peak sep-dec months and if those don’t materialize we could see a lot more bankruptcies, defaults, and waves of debt across all sectors.
We reveal the kind of person we are to the extent that we let others identify with us. ,